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Taxes Due 2012

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Taxes Due 2012

Taxes due 2012 2. Taxes due 2012   Possession Source Income Table of Contents Types of IncomeCompensation for Labor or Personal Services Investment Income Sales or Other Dispositions of Property Scholarships, Fellowships, Grants, Prizes, and Awards Effectively Connected Income In order to determine where to file your return and which form(s) you need to complete, you must determine the source of each item of income you received during the tax year. Taxes due 2012 Income you received from sources within, or that was effectively connected with the conduct of a trade or business within, the relevant possession must be identified separately from U. Taxes due 2012 S. Taxes due 2012 or foreign source income. Taxes due 2012 This chapter discusses the rules for determining if the source of your income is from: American Samoa, The Commonwealth of the Northern Mariana Islands (CNMI), The Commonwealth of Puerto Rico (Puerto Rico), Guam, or The U. Taxes due 2012 S. Taxes due 2012 Virgin Islands (USVI). Taxes due 2012 Generally, the same rules that apply for determining U. Taxes due 2012 S. Taxes due 2012 source income also apply for determining possession source income. Taxes due 2012 However, there are some important exceptions to these rules. Taxes due 2012 Both the general rules and the exceptions are discussed in this chapter. Taxes due 2012 U. Taxes due 2012 S. Taxes due 2012 income rule. Taxes due 2012   This rule states that income is not possession source income if, under the rules of Internal Revenue Code sections 861–865, it is treated as income: From sources within the United States, or Effectively connected with the conduct of a trade or business within the United States. Taxes due 2012 Table 2-1 shows the general rules for determining whether income is from sources within the United States. Taxes due 2012 Table 2-1. Taxes due 2012 General Rules for Determining U. Taxes due 2012 S. Taxes due 2012 Source of Income Item of Income Factor Determining Source Salaries, wages, and other compensation for labor or personal services Where labor or services performed Pensions Contributions: Where services were performed that earned the pension Investment earnings: Where pension trust is located Interest Residence of payer Dividends Where corporation created or organized Rents Location of property Royalties:   Natural resources Location of property Patents, copyrights, etc. Taxes due 2012 Where property is used Sale of business inventory—purchased Where sold Sale of business inventory—produced Allocation if produced and sold in different locations Sale of real property Location of property Sale of personal property Seller's tax home (but see Special Rules for Gains From Dispositions of Certain Property , later, for exceptions) Sale of natural resources Allocation based on fair market value of product at export terminal. Taxes due 2012 For more information, see Regulations section 1. Taxes due 2012 863-1(b). Taxes due 2012 Types of Income This section looks at the most common types of income received by individuals, and the rules for determining the source of the income. Taxes due 2012 Generally, the same rules shown in Table 2-1 are used to determine if you have possession source income. Taxes due 2012 Compensation for Labor or Personal Services Income from labor or personal services includes wages, salaries, commissions, fees, per diem allowances, employee allowances and bonuses, and fringe benefits. Taxes due 2012 It also includes income earned by sole proprietors and general partners from providing personal services in the course of their trade or business. Taxes due 2012 Services performed wholly within a relevant possession. Taxes due 2012   Generally, all pay you receive for services performed in a relevant possession is considered to be from sources within that possession. Taxes due 2012 However, there is an exception for income earned as a member of the U. Taxes due 2012 S. Taxes due 2012 Armed Forces or a civilian spouse. Taxes due 2012 U. Taxes due 2012 S. Taxes due 2012 Armed Forces. Taxes due 2012   If you are a bona fide resident of a relevant possession, your military service pay will be sourced in that possession even if you perform the services in the United States or another possession. Taxes due 2012 However, if you are not a bona fide resident of a possession, your military service pay will be income from the  United States even if you perform services in a possession. Taxes due 2012 Civilian spouse of active duty member of the U. Taxes due 2012 S. Taxes due 2012 Armed Forces. Taxes due 2012   If you are a bona fide resident of a U. Taxes due 2012 S. Taxes due 2012 possession and choose to keep that possession as your tax residence under MSRRA when relocating with your servicemember spouse under military orders, the source of income for your labor or personal services is considered to be that possession. Taxes due 2012 Likewise, if your tax residence is in one of the 50 states or the District of Columbia before relocating and you choose to keep it as your tax residence, the source of income for services performed in any of the U. Taxes due 2012 S. Taxes due 2012 possessions is considered to be the United States and, specifically, your state of residence or the District of Columbia. Taxes due 2012 Services performed partly inside and partly outside a relevant possession. Taxes due 2012   If you are an employee and receive compensation for labor or personal services performed both inside and outside the relevant possession, special rules apply in determining the source of the compensation. Taxes due 2012 Compensation (other than certain fringe benefits) is sourced on a time basis. Taxes due 2012 Certain fringe benefits (such as housing and education) are sourced on a geographical basis. Taxes due 2012   Or, you may be permitted to use an alternative basis to determine the source of compensation. Taxes due 2012 See Alternative basis , later. Taxes due 2012   If you are self-employed, determine the source of your income for labor or personal services from self-employment on the basis that most correctly reflects the proper source of that income under the facts and circumstances of your particular case. Taxes due 2012 In many cases, the facts and circumstances will call for an apportionment on a time basis as explained next. Taxes due 2012 Time basis. Taxes due 2012   Use a time basis to figure your compensation for labor or personal services from the relevant possession (other than the fringe benefits discussed later). Taxes due 2012 Do this by multiplying your total compensation (other than the fringe benefits discussed later) by the following fraction:   Number of days you performed  services in the relevant  possession during the year     Total number of days you  performed services during the year           You can use a unit of time less than a day in the above fraction, if appropriate. Taxes due 2012 The time period for which the income is made does not have to be a year. Taxes due 2012 Instead, you can use another distinct, separate, and continuous time period if you can establish to the satisfaction of the IRS that this other period is more appropriate. Taxes due 2012 Example. Taxes due 2012 In 2013, you worked in your employer's office in the United States for 60 days and in the Puerto Rico office for 180 days, earning a total of $80,000 for the year. Taxes due 2012 Your Puerto Rico source income is $60,000, figured as follows. Taxes due 2012       180 days 240 days × $80,000 = $60,000                 Multi-year compensation. Taxes due 2012   The source of multi-year compensation is generally determined on a time basis over the period to which the compensation is attributable. Taxes due 2012 Multi-year compensation is compensation that is included in your income in 1 tax year but is attributable to a period that includes 2 or more tax years. Taxes due 2012 You determine the period to which the income is attributable based on the facts and circumstances of your case. Taxes due 2012 For more information on multi-year compensation, see Treasury Decision (T. Taxes due 2012 D. Taxes due 2012 ) 9212 and Regulations section 1. Taxes due 2012 861-4, 2005-35 I. Taxes due 2012 R. Taxes due 2012 B. Taxes due 2012 429, available at www. Taxes due 2012 irs. Taxes due 2012 gov/irb/2005-35_IRB/ar14. Taxes due 2012 html. Taxes due 2012 Certain fringe benefits sourced on a geographical basis. Taxes due 2012   If you received any of the following fringe benefits as compensation for labor or services performed as an employee partly inside and partly outside a relevant possession, you must source that income on a geographical basis. Taxes due 2012 Housing. Taxes due 2012 Education. Taxes due 2012 Local transportation. Taxes due 2012 Tax reimbursement. Taxes due 2012 Hazardous or hardship duty pay. Taxes due 2012 Moving expense reimbursement. Taxes due 2012 For information on determining the source of the fringe benefits listed above, see Regulations section 1. Taxes due 2012 861-4. Taxes due 2012 Alternative basis. Taxes due 2012   You can determine the source of your compensation under an alternative basis if you establish to the satisfaction of the IRS that, under the facts and circumstances of your case, the alternative basis more properly determines the source of your income than the time or geographical basis. Taxes due 2012 If you use an alternative basis, you must keep (and have available for inspection) records to document why the alternative basis more properly determines the source of your income. Taxes due 2012 De minimis exception. Taxes due 2012   There is an exception to the rule for determining the source of income earned in a possession. Taxes due 2012 Generally, you will not have income from a possession if during a tax year you: Are a U. Taxes due 2012 S. Taxes due 2012 citizen or resident, Are not a bona fide resident of that possession, Are not employed by or under contract with an individual, partnership, or corporation that is engaged in a trade or business in that possession, Temporarily perform services in that possession for 90 days or less, and Earned $3,000 or less from such services. Taxes due 2012 This exception began with income earned during your 2008 tax year. Taxes due 2012 Pensions. Taxes due 2012   Generally, pension income has two components: contributions to the pension plan and the earnings accrued from investing those contributions. Taxes due 2012 The contribution portion is sourced according to where services were performed that earned the pension. Taxes due 2012 The investment earnings portion is sourced according to the location of the pension trust. Taxes due 2012 Example. Taxes due 2012 You are a U. Taxes due 2012 S. Taxes due 2012 citizen who worked in Puerto Rico for a U. Taxes due 2012 S. Taxes due 2012 company. Taxes due 2012 All services were performed in Puerto Rico. Taxes due 2012 Upon retirement you remained in Puerto Rico and began receiving your pension from the U. Taxes due 2012 S. Taxes due 2012 pension trust of your employer. Taxes due 2012 Distributions from the U. Taxes due 2012 S. Taxes due 2012 pension trust must be allocated between (1) contributions, which are Puerto Rico source income, and (2) investment earnings, which are U. Taxes due 2012 S. Taxes due 2012 source income. Taxes due 2012 Investment Income This category includes such income as interest, dividends, rents, and royalties. Taxes due 2012 Interest income. Taxes due 2012   The source of interest income is generally determined by the residence of the payer. Taxes due 2012 Interest paid by corporations created or organized in a relevant possession (possession corporation) or by individuals who are bona fide residents of a relevant possession is considered income from sources within that possession. Taxes due 2012   However, there is an exception to this rule if you are a bona fide resident of a relevant possession, receive interest from a corporation created or organized in that possession, and are a shareholder of that corporation who owns, directly or indirectly, at least 10% of the total voting stock of the corporation. Taxes due 2012 See Regulations section 1. Taxes due 2012 937-2(i) for more information. Taxes due 2012 Dividends. Taxes due 2012   Generally, dividends paid by a corporation created or organized in a relevant possession will be considered income from sources within that possession. Taxes due 2012 There are additional rules for bona fide residents of a relevant possession who receive dividend income from possession corporations, and who own, directly or indirectly, at least 10% of the voting stock of the corporation. Taxes due 2012 For more information, see Regulations section 1. Taxes due 2012 937-2(g). Taxes due 2012 Rental income. Taxes due 2012   Rents from property located in a relevant possession are treated as income from sources within that possession. Taxes due 2012 Royalties. Taxes due 2012   Royalties from natural resources located in a relevant possession are considered income from sources within that possession. Taxes due 2012   Also considered possession source income are royalties received for the use of, or for the privilege of using, in a relevant possession, patents, copyrights, secret processes and formulas, goodwill, trademarks, trade brands, franchises, and other like property. Taxes due 2012 Sales or Other Dispositions of Property The source rules for sales or other dispositions of property are varied. Taxes due 2012 The most common situations are discussed below. Taxes due 2012 Real property. Taxes due 2012   Real property includes land and buildings, and generally anything built on, growing on, or attached to land. Taxes due 2012 The location of the property generally determines the source of income from the sale. Taxes due 2012 For example, if you are a bona fide resident of Guam and sell your home that is located in Guam, the gain on the sale is sourced in Guam. Taxes due 2012 If, however, the home you sold was located in the United States, the gain is U. Taxes due 2012 S. Taxes due 2012 source income. Taxes due 2012 Personal property. Taxes due 2012   The term “personal property” refers to property (such as machinery, equipment, or furniture) that is not real property. Taxes due 2012 Generally, gain (or loss) from the sale or other disposition is sourced according to the seller's tax home. Taxes due 2012 If personal property is sold by a bona fide resident of a relevant possession, the gain (or loss) from the sale is treated as sourced within that possession. Taxes due 2012   This rule does not apply to the sale of inventory, intangible property, depreciable personal property, or property sold through a foreign office or fixed place of business. Taxes due 2012 The rules applying to sales of inventory are discussed below. Taxes due 2012 For information on sales of the other types of property mentioned, see Internal Revenue Code section 865. Taxes due 2012 Inventory. Taxes due 2012   Your inventory is personal property that is stock in trade or that is held primarily for sale to customers in the ordinary course of your trade or business. Taxes due 2012 The source of income from the sale of inventory depends on whether the inventory was purchased or produced. Taxes due 2012 Purchased. Taxes due 2012   Income from the sale of inventory that you purchased is sourced where you sell the property. Taxes due 2012 Generally, this is where title to the property passes to the buyer. Taxes due 2012 Produced. Taxes due 2012   Income from the sale of inventory that you produced in a relevant possession and sold outside that possession (or vice versa) is sourced based on an allocation. Taxes due 2012 For information on making the allocation, see Regulations section 1. Taxes due 2012 863-3(f). Taxes due 2012 Special Rules for Gains From Dispositions of Certain Property There are special rules for gains from dispositions of certain investment property (for example, stocks, bonds, debt instruments, diamonds, and gold) owned by a U. Taxes due 2012 S. Taxes due 2012 citizen or resident alien prior to becoming a bona fide resident of a possession. Taxes due 2012 You are subject to these special rules if you meet both of the following conditions. Taxes due 2012 For the tax year for which the source of the gain must be determined, you are a bona fide resident of the relevant possession. Taxes due 2012 For any of the 10 years preceding that year, you were a citizen or resident alien of the United States (other than a bona fide resident of the relevant possession). Taxes due 2012 If you meet these conditions, gains from the disposition of this property will not be treated as income from sources within the relevant possession for purposes of the Internal Revenue Code. Taxes due 2012 Accordingly, bona fide residents of American Samoa and Puerto Rico, for example, may not exclude the gain on their U. Taxes due 2012 S. Taxes due 2012 tax return. Taxes due 2012 (See chapter 3 for additional filing information. Taxes due 2012 ) With respect to the CNMI, Guam, and the USVI, the gain from the disposition of this property will not meet the requirements for certain tax rules that may allow bona fide residents of those possessions to reduce or obtain a rebate of taxes on income from sources within the relevant possessions. Taxes due 2012 These rules apply to dispositions after April 11, 2005. Taxes due 2012 For details, see Regulations section 1. Taxes due 2012 937-2(f)(1) and Examples 1 and 2 of section 1. Taxes due 2012 937-2(k). Taxes due 2012 Example 1. Taxes due 2012 In 2007, Cheryl Jones, a U. Taxes due 2012 S. Taxes due 2012 citizen, lived in the United States and paid $1,000 for 100 shares of stock in the Rose Corporation, a U. Taxes due 2012 S. Taxes due 2012 corporation listed on the New York Stock Exchange. Taxes due 2012 On March 1, 2010, she moved to Puerto Rico and changed her tax home to Puerto Rico on the same date. Taxes due 2012 Cheryl satisfied the presence test in 2010 and, under the year-of-move exception, she was considered a bona fide resident of Puerto Rico for the rest of 2010. Taxes due 2012 On March 1, 2010, the closing value of Cheryl's stock in the Rose Corporation was $2,000. Taxes due 2012 On January 5, 2013, while still a bona fide resident of Puerto Rico, Cheryl sold all her Rose Corporation stock for $7,000. Taxes due 2012 Under the earlier rules, none of Cheryl's $6,000 gain will be treated as income from sources within Puerto Rico. Taxes due 2012 The source rules discussed in the preceding paragraphs supplement, and may apply in conjunction with, an existing special rule. Taxes due 2012 This existing special rule applies if you are a U. Taxes due 2012 S. Taxes due 2012 citizen or resident alien who becomes a bona fide resident of American Samoa, the CNMI, or Guam, and who has gain from the disposition of certain U. Taxes due 2012 S. Taxes due 2012 assets during the 10-year period beginning when you became a bona fide resident. Taxes due 2012 The gain is U. Taxes due 2012 S. Taxes due 2012 source income that generally is subject to U. Taxes due 2012 S. Taxes due 2012 tax if the property is either (1) located in the United States; (2) stock issued by a U. Taxes due 2012 S. Taxes due 2012 corporation or a debt obligation of a U. Taxes due 2012 S. Taxes due 2012 person or of the United States, a state (or political subdivision), or the District of Columbia; or (3) property that has a basis in whole or in part by reference to property described in (1) or (2). Taxes due 2012 See chapter 3 for filing information. Taxes due 2012 Special election. Taxes due 2012   For dispositions after April 11, 2005, you can choose to treat the part of gain (or loss) attributable to the time you held the property while a bona fide resident of the relevant possession (the possession holding period) as gain (or loss) from sources within that possession. Taxes due 2012 Make the election by reporting the gain attributable to the possession holding period on your income tax return for the year of disposition. Taxes due 2012 This election overrides both of the special rules discussed earlier. Taxes due 2012   There are two methods for figuring the gain for the possession holding period, one for marketable securities and another for other types of investment property. Taxes due 2012 Marketable securities. Taxes due 2012   Marketable securities are those actively traded on an established financial market, such as stock in a publicly held corporation. Taxes due 2012 Under the special election, allocate the gain (or loss) by figuring the appreciation separately for your possession and U. Taxes due 2012 S. Taxes due 2012 holding periods. Taxes due 2012   Your possession holding period begins on the first day you do not have a tax home outside the relevant possession. Taxes due 2012 The gain (or loss) attributable to the possession holding period is the difference in fair market value of the security at the close of the market on the first and last days of this holding period. Taxes due 2012 This is your gain (or loss) that is treated as being from sources within the relevant possession. Taxes due 2012 If you were a bona fide resident of the relevant possession for more than one continuous period, combine the gains (or losses) from each possession holding period. Taxes due 2012 Example 2. Taxes due 2012 Assume the same facts as in Example 1, except that Cheryl makes the special election to allocate the gain between her U. Taxes due 2012 S. Taxes due 2012 and possession holding periods. Taxes due 2012 Cheryl's possession holding period began March 1, 2010, the date her tax home changed to Puerto Rico. Taxes due 2012 Therefore, the portion of gain attributable to her possession holding period is $5,000 ($7,000 sale price – $2,000 closing value on first day of the possession holding period). Taxes due 2012 By reporting $5,000 of her $6,000 gain as Puerto Rico source income on her 2013 Puerto Rico tax return (and the remainder as non-Puerto Rico source income), Cheryl elects to treat that amount as Puerto Rico source income. Taxes due 2012 Other personal property. Taxes due 2012   For personal property other than marketable securities, use a time-based allocation. Taxes due 2012 Figure the gain (or loss) attributable to the possession holding period by multiplying your total gain (or loss) by the following fraction. Taxes due 2012      Number of days in the  possession holding period     Total number of days  in your holding period         The result is your gain (or loss) that is treated as being from sources within the relevant possession. Taxes due 2012 Example 3. Taxes due 2012 In addition to the stock in Rose Corporation, Cheryl acquired a 5% interest in the Alder Partnership on January 1, 2009. Taxes due 2012 On March 1, 2010, when she established bona fide residency in Puerto Rico, her partnership interest was not considered a marketable security. Taxes due 2012 On September 16, 2013, while still a bona fide resident of Puerto Rico, Cheryl sold her interest in Alder Partnership for a $100,000 gain. Taxes due 2012 She had owned the interest for a total of 1,720 days. Taxes due 2012 Cheryl's possession holding period (from March 1, 2010, through September 16, 2013) is 1,296 days. Taxes due 2012 The portion of her gain attributable to Puerto Rico is $75,349 ($100,000 x (1,296 Puerto Rico days ÷ 1,720 total days)). Taxes due 2012 By reporting $75,349 of her $100,000 gain as Puerto Rico source income on her 2013 Puerto Rico tax return (and the remainder as non-Puerto Rico source income), Cheryl elects to treat that amount as Puerto Rico source income. Taxes due 2012 Scholarships, Fellowships, Grants, Prizes, and Awards The source of these types of income is generally the residence of the payer, regardless of who actually disburses the funds. Taxes due 2012 Therefore, in order to be possession source income, the payer must be a resident of the relevant possession, such as an individual who is a bona fide resident or a corporation created or organized in that possession. Taxes due 2012 These rules do not apply to amounts paid as salary or other compensation for services. Taxes due 2012 See Compensation for Labor or Personal Services, earlier in this chapter, for the source rules that apply. Taxes due 2012 Effectively Connected Income In limited circumstances, some kinds of income from sources outside the relevant possession must be treated as effectively connected with a trade or business in that possession. Taxes due 2012 These circumstances are listed below. Taxes due 2012 You have an office or other fixed place of business in the relevant possession to which the income can be attributed. Taxes due 2012 That office or place of business is a material factor in producing the income. Taxes due 2012 The income is produced in the ordinary course of the trade or business carried on through that office or other fixed place of business. Taxes due 2012 An office or other fixed place of business is a material factor if it significantly contributes to, and is an essential economic element in, the earning of the income. Taxes due 2012 The three kinds of income from sources outside the relevant possession to which these rules apply are the following. Taxes due 2012 Rents and royalties for the use of, or for the privilege of using, intangible personal property located outside the relevant possession or from any interest in such property. Taxes due 2012 Included are rents or royalties for the use of, or for the privilege of using, outside the relevant possession, patents, copyrights, secret processes and formulas, goodwill, trademarks, trade brands, franchises, and similar properties if the rents or royalties are from the active conduct of a trade or business in the relevant possession. Taxes due 2012 Dividends or interest from the active conduct of a banking, financing, or similar business in the relevant possession. Taxes due 2012 Income, gain, or loss from the sale or exchange outside the relevant possession, through the office or other fixed place of business in the relevant possession, of: Stock in trade, Property that would be included in inventory if on hand at the end of the tax year, or Property held primarily for sale to customers in the ordinary course of business. Taxes due 2012 Item (3) will not apply if you sold the property for use, consumption, or disposition outside the relevant possession and an office or other fixed place of business in a foreign country was a material factor in the sale. Taxes due 2012 Example. Taxes due 2012 Marcy Jackson is a bona fide resident of American Samoa. Taxes due 2012 Her business, which she conducts from an office in American Samoa, is developing and selling specialized computer software. Taxes due 2012 A software purchaser will frequently pay Marcy an additional amount to install the software on the purchaser's operating system and to ensure that the software is functioning properly. Taxes due 2012 Marcy installs the software at the purchaser's place of business, which may be in American Samoa, in the United States, or in another country. Taxes due 2012 The income from selling the software is effectively connected with the conduct of Marcy's business in American Samoa, even though the product's destination may be outside the possession. Taxes due 2012 However, the compensation she receives for installing the software (personal services) outside of American Samoa is not effectively connected with the conduct of her business in the possession—the income is sourced where she performs the services. Taxes due 2012 Prev  Up  Next   Home   More Online Publications
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Fiscal Year 2013 Enforcement and Service Results

The Fiscal Year 2013 Enforcement and Service Results tables provide details about IRS audit, collection and taxpayer service. Fiscal Year 2013 began on Oct. 1, 2012, and ended on Sept. 30, 2013.

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The Taxes Due 2012

Taxes due 2012 15. Taxes due 2012   Selling Your Home Table of Contents Reminder Introduction Useful Items - You may want to see: Main Home Figuring Gain or LossSelling Price Amount Realized Adjusted Basis Amount of Gain or Loss Dispositions Other Than Sales Determining Basis Excluding the GainMaximum Exclusion Ownership and Use Tests Reduced Maximum Exclusion Business Use or Rental of Home Reporting the SaleSeller-financed mortgage. Taxes due 2012 More information. Taxes due 2012 Special SituationsException for sales to related persons. Taxes due 2012 Recapturing (Paying Back) a Federal Mortgage Subsidy Reminder Home sold with undeducted points. Taxes due 2012  If you have not deducted all the points you paid to secure a mortgage on your old home, you may be able to deduct the remaining points in the year of the sale. Taxes due 2012 See Mortgage ending early under Points in chapter 23. Taxes due 2012 Introduction This chapter explains the tax rules that apply when you sell your main home. Taxes due 2012 In most cases, your main home is the one in which you live most of the time. Taxes due 2012 If you sold your main home in 2013, you may be able to exclude from income any gain up to a limit of $250,000 ($500,000 on a joint return in most cases). Taxes due 2012 See Excluding the Gain , later. Taxes due 2012 Generally, if you can exclude all the gain, you do not need to report the sale on your tax return. Taxes due 2012 If you have gain that cannot be excluded, it is taxable. Taxes due 2012 Report it on Form 8949, Sales and Other Dispositions of Capital Assets, and Schedule D (Form 1040). Taxes due 2012 You may also have to complete Form 4797, Sales of Business Property. Taxes due 2012 See Reporting the Sale , later. Taxes due 2012 If you have a loss on the sale, you generally cannot deduct it on your return. Taxes due 2012 However, you may need to report it. Taxes due 2012 See Reporting the Sale , later. Taxes due 2012 The following are main topics in this chapter. Taxes due 2012 Figuring gain or loss. Taxes due 2012 Basis. Taxes due 2012 Excluding the gain. Taxes due 2012 Ownership and use tests. Taxes due 2012 Reporting the sale. Taxes due 2012 Other topics include the following. Taxes due 2012 Business use or rental of home. Taxes due 2012 Recapturing a federal mortgage subsidy. Taxes due 2012 Useful Items - You may want to see: Publication 523 Selling Your Home 530 Tax Information for Homeowners 547 Casualties, Disasters, and Thefts Form (and Instructions) Schedule D (Form 1040) Capital Gains and Losses 982 Reduction of Tax Attributes Due to Discharge of Indebtedness 8828 Recapture of Federal Mortgage Subsidy 8949 Sales and Other Dispositions of Capital Assets Main Home This section explains the term “main home. Taxes due 2012 ” Usually, the home you live in most of the time is your main home and can be a: House, Houseboat, Mobile home, Cooperative apartment, or Condominium. Taxes due 2012 To exclude gain under the rules of this chapter, you in most cases must have owned and lived in the property as your main home for at least 2 years during the 5-year period ending on the date of sale. Taxes due 2012 Land. Taxes due 2012   If you sell the land on which your main home is located, but not the house itself, you cannot exclude any gain you have from the sale of the land. Taxes due 2012 However, if you sell vacant land used as part of your main home and that is adjacent to it, you may be able to exclude the gain from the sale under certain circumstances. Taxes due 2012 See Vacant land under Main Home in Publication 523 for more information. Taxes due 2012 Example. Taxes due 2012 You buy a piece of land and move your main home to it. Taxes due 2012 Then you sell the land on which your main home was located. Taxes due 2012 This sale is not considered a sale of your main home, and you cannot exclude any gain on the sale of the land. Taxes due 2012 More than one home. Taxes due 2012   If you have more than one home, you can exclude gain only from the sale of your main home. Taxes due 2012 You must include in income gain from the sale of any other home. Taxes due 2012 If you have two homes and live in both of them, your main home is ordinarily the one you live in most of the time during the year. Taxes due 2012 Example 1. Taxes due 2012 You own two homes, one in New York and one in Florida. Taxes due 2012 From 2009 through 2013, you live in the New York home for 7 months and in the Florida residence for 5 months of each year. Taxes due 2012 In the absence of facts and circumstances indicating otherwise, the New York home is your main home. Taxes due 2012 You would be eligible to exclude the gain from the sale of the New York home but not of the Florida home in 2013. Taxes due 2012 Example 2. Taxes due 2012 You own a house, but you live in another house that you rent. Taxes due 2012 The rented house is your main home. Taxes due 2012 Example 3. Taxes due 2012 You own two homes, one in Virginia and one in New Hampshire. Taxes due 2012 In 2009 and 2010, you lived in the Virginia home. Taxes due 2012 In 2011 and 2012, you lived in the New Hampshire home. Taxes due 2012 In 2013, you lived again in the Virginia home. Taxes due 2012 Your main home in 2009, 2010, and 2013 is the Virginia home. Taxes due 2012 Your main home in 2011 and 2012 is the New Hampshire home. Taxes due 2012 You would be eligible to exclude gain from the sale of either home (but not both) in 2013. Taxes due 2012 Property used partly as your main home. Taxes due 2012   If you use only part of the property as your main home, the rules discussed in this publication apply only to the gain or loss on the sale of that part of the property. Taxes due 2012 For details, see Business Use or Rental of Home , later. Taxes due 2012 Figuring Gain or Loss To figure the gain or loss on the sale of your main home, you must know the selling price, the amount realized, and the adjusted basis. Taxes due 2012 Subtract the adjusted basis from the amount realized to get your gain or loss. Taxes due 2012     Selling price     − Selling expenses       Amount realized       Amount realized     − Adjusted basis       Gain or loss   Selling Price The selling price is the total amount you receive for your home. Taxes due 2012 It includes money and the fair market value of any other property or any other services you receive and all notes, mortgages or other debts assumed by the buyer as part of the sale. Taxes due 2012 Payment by employer. Taxes due 2012   You may have to sell your home because of a job transfer. Taxes due 2012 If your employer pays you for a loss on the sale or for your selling expenses, do not include the payment as part of the selling price. Taxes due 2012 Your employer will include it as wages in box 1 of your Form W-2, and you will include it in your income on Form 1040, line 7. Taxes due 2012 Option to buy. Taxes due 2012   If you grant an option to buy your home and the option is exercised, add the amount you receive for the option to the selling price of your home. Taxes due 2012 If the option is not exercised, you must report the amount as ordinary income in the year the option expires. Taxes due 2012 Report this amount on Form 1040, line 21. Taxes due 2012 Form 1099-S. Taxes due 2012   If you received Form 1099-S, Proceeds From Real Estate Transactions, box 2 (Gross proceeds) should show the total amount you received for your home. Taxes due 2012   However, box 2 will not include the fair market value of any services or property other than cash or notes you received or will receive. Taxes due 2012 Instead, box 4 will be checked to indicate your receipt or expected receipt of these items. Taxes due 2012 Amount Realized The amount realized is the selling price minus selling expenses. Taxes due 2012 Selling expenses. Taxes due 2012   Selling expenses include: Commissions, Advertising fees, Legal fees, and Loan charges paid by the seller, such as loan placement fees or “points. Taxes due 2012 ” Adjusted Basis While you owned your home, you may have made adjustments (increases or decreases) to the basis. Taxes due 2012 This adjusted basis must be determined before you can figure gain or loss on the sale of your home. Taxes due 2012 For information on how to figure your home's adjusted basis, see Determining Basis , later. Taxes due 2012 Amount of Gain or Loss To figure the amount of gain or loss, compare the amount realized to the adjusted basis. Taxes due 2012 Gain on sale. Taxes due 2012   If the amount realized is more than the adjusted basis, the difference is a gain and, except for any part you can exclude, in most cases is taxable. Taxes due 2012 Loss on sale. Taxes due 2012   If the amount realized is less than the adjusted basis, the difference is a loss. Taxes due 2012 A loss on the sale of your main home cannot be deducted. Taxes due 2012 Jointly owned home. Taxes due 2012   If you and your spouse sell your jointly owned home and file a joint return, you figure your gain or loss as one taxpayer. Taxes due 2012 Separate returns. Taxes due 2012   If you file separate returns, each of you must figure your own gain or loss according to your ownership interest in the home. Taxes due 2012 Your ownership interest is generally determined by state law. Taxes due 2012 Joint owners not married. Taxes due 2012   If you and a joint owner other than your spouse sell your jointly owned home, each of you must figure your own gain or loss according to your ownership interest in the home. Taxes due 2012 Each of you applies the rules discussed in this chapter on an individual basis. Taxes due 2012 Dispositions Other Than Sales Some special rules apply to other dispositions of your main home. Taxes due 2012 Foreclosure or repossession. Taxes due 2012   If your home was foreclosed on or repossessed, you have a disposition. Taxes due 2012 See Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments, to determine if you have ordinary income, gain, or loss. Taxes due 2012 Abandonment. Taxes due 2012   If you abandon your home, see Publication 4681 to determine if you have ordinary income, gain, or loss. Taxes due 2012 Trading (exchanging) homes. Taxes due 2012   If you trade your old home for another home, treat the trade as a sale and a purchase. Taxes due 2012 Example. Taxes due 2012 You owned and lived in a home with an adjusted basis of $41,000. Taxes due 2012 A real estate dealer accepted your old home as a trade-in and allowed you $50,000 toward a new home priced at $80,000. Taxes due 2012 This is treated as a sale of your old home for $50,000 with a gain of $9,000 ($50,000 – $41,000). Taxes due 2012 If the dealer had allowed you $27,000 and assumed your unpaid mortgage of $23,000 on your old home, your sales price would still be $50,000 (the $27,000 trade-in allowed plus the $23,000 mortgage assumed). Taxes due 2012 Transfer to spouse. Taxes due 2012   If you transfer your home to your spouse or you transfer it to your former spouse incident to your divorce, you in most cases have no gain or loss. Taxes due 2012 This is true even if you receive cash or other consideration for the home. Taxes due 2012 As a result, the rules in this chapter do not apply. Taxes due 2012 More information. Taxes due 2012   If you need more information, see Transfer to spouse in Publication 523 and Property Settlements in Publication 504, Divorced or Separated Individuals. Taxes due 2012 Involuntary conversion. Taxes due 2012   You have a disposition when your home is destroyed or condemned and you receive other property or money in payment, such as insurance or a condemnation award. Taxes due 2012 This is treated as a sale and you may be able to exclude all or part of any gain from the destruction or condemnation of your home, as explained later under Special Situations . Taxes due 2012 Determining Basis You need to know your basis in your home to figure any gain or loss when you sell it. Taxes due 2012 Your basis in your home is determined by how you got the home. Taxes due 2012 Generally, your basis is its cost if you bought it or built it. Taxes due 2012 If you got it in some other way (inheritance, gift, etc. Taxes due 2012 ), your basis is generally either its fair market value when you received it or the adjusted basis of the previous owner. Taxes due 2012 While you owned your home, you may have made adjustments (increases or decreases) to your home's basis. Taxes due 2012 The result of these adjustments is your home's adjusted basis, which is used to figure gain or loss on the sale of your home. Taxes due 2012 See Adjusted Basis , later. Taxes due 2012 You can find more information on basis and adjusted basis in chapter 13 of this publication and in Publication 523. Taxes due 2012 Cost As Basis The cost of property is the amount you paid for it in cash, debt obligations, other property, or services. Taxes due 2012 Purchase. Taxes due 2012   If you bought your home, your basis is its cost to you. Taxes due 2012 This includes the purchase price and certain settlement or closing costs. Taxes due 2012 In most cases, your purchase price includes your down payment and any debt, such as a first or second mortgage or notes you gave the seller in payment for the home. Taxes due 2012 If you build, or contract to build, a new home, your purchase price can include costs of construction, as discussed in Publication 523. Taxes due 2012 Settlement fees or closing costs. Taxes due 2012   When you bought your home, you may have paid settlement fees or closing costs in addition to the contract price of the property. Taxes due 2012 You can include in your basis some of the settlement fees and closing costs you paid for buying the home, but not the fees and costs for getting a mortgage loan. Taxes due 2012 A fee paid for buying the home is any fee you would have had to pay even if you paid cash for the home (that is, without the need for financing). Taxes due 2012    Chapter 13 lists some of the settlement fees and closing costs that you can include in the basis of property, including your home. Taxes due 2012 It also lists some settlement costs that cannot be included in basis. Taxes due 2012   Also see Publication 523 for additional items and a discussion of basis other than cost. Taxes due 2012 Adjusted Basis Adjusted basis is your cost or other basis increased or decreased by certain amounts. Taxes due 2012 To figure your adjusted basis, you can use Worksheet 1 in Publication 523. Taxes due 2012 Do not use Worksheet 1 if you acquired an interest in your home from a decedent who died in 2010 and whose executor filed Form 8939, Allocation of Increase in Basis for Property Acquired From a Decedent. Taxes due 2012 Increases to basis. Taxes due 2012   These include the following. Taxes due 2012 Additions and other improvements that have a useful life of more than 1 year. Taxes due 2012 Special assessments for local improvements. Taxes due 2012 Amounts you spent after a casualty to restore damaged property. Taxes due 2012 Improvements. Taxes due 2012   These add to the value of your home, prolong its useful life, or adapt it to new uses. Taxes due 2012 You add the cost of additions and other improvements to the basis of your property. Taxes due 2012   For example, putting a recreation room or another bathroom in your unfinished basement, putting up a new fence, putting in new plumbing or wiring, putting on a new roof, or paving your unpaved driveway are improvements. Taxes due 2012 An addition to your house, such as a new deck, a sunroom, or a new garage, is also an improvement. Taxes due 2012 Repairs. Taxes due 2012   These maintain your home in good condition but do not add to its value or prolong its life. Taxes due 2012 You do not add their cost to the basis of your property. Taxes due 2012   Examples of repairs include repainting your house inside or outside, fixing your gutters or floors, repairing leaks or plastering, and replacing broken window panes. Taxes due 2012 Decreases to basis. Taxes due 2012   These include the following. Taxes due 2012 Discharge of qualified principal residence indebtedness that was excluded from income. Taxes due 2012 Some or all of the cancellation of debt income that was excluded due to your bankruptcy or insolvency. Taxes due 2012 For details, see Publication 4681. Taxes due 2012 Gain you postponed from the sale of a previous home before May 7, 1997. Taxes due 2012 Deductible casualty losses. Taxes due 2012 Insurance payments you received or expect to receive for casualty losses. Taxes due 2012 Payments you received for granting an easement or right-of-way. Taxes due 2012 Depreciation allowed or allowable if you used your home for business or rental purposes. Taxes due 2012 Energy-related credits allowed for expenditures made on the residence. Taxes due 2012 (Reduce the increase in basis otherwise allowable for expenditures on the residence by the amount of credit allowed for those expenditures. Taxes due 2012 ) Adoption credit you claimed for improvements added to the basis of your home. Taxes due 2012 Nontaxable payments from an adoption assistance program of your employer you used for improvements you added to the basis of your home. Taxes due 2012 Energy conservation subsidy excluded from your gross income because you received it (directly or indirectly) from a public utility after 1992 to buy or install any energy conservation measure. Taxes due 2012 An energy conservation measure is an installation or modification primarily designed either to reduce consumption of electricity or natural gas or to improve the management of energy demand for a home. Taxes due 2012 District of Columbia first-time homebuyer credit (allowed on the purchase of a principal residence in the District of Columbia beginning on August 5, 1997 and before January 1, 2012). Taxes due 2012 General sales taxes (allowed beginning 2004 and ending before 2014) claimed as an itemized deduction on Schedule A (Form 1040) that were imposed on the purchase of personal property, such as a houseboat used as your home or a mobile home. Taxes due 2012 Discharges of qualified principal residence indebtedness. Taxes due 2012   You may be able to exclude from gross income a discharge of qualified principal residence indebtedness. Taxes due 2012 This exclusion applies to discharges made after 2006 and before 2014. Taxes due 2012 If you choose to exclude this income, you must reduce (but not below zero) the basis of the principal residence by the amount excluded from your gross income. Taxes due 2012   File Form 982 with your tax return. Taxes due 2012 See the form's instructions for detailed information. Taxes due 2012 Recordkeeping. Taxes due 2012 You should keep records to prove your home's adjusted basis. Taxes due 2012 Ordinarily, you must keep records for 3 years after the due date for filing your return for the tax year in which you sold your home. Taxes due 2012 But if you sold a home before May 7, 1997, and postponed tax on any gain, the basis of that home affects the basis of the new home you bought. Taxes due 2012 Keep records proving the basis of both homes as long as they are needed for tax purposes. Taxes due 2012 The records you should keep include: Proof of the home's purchase price and purchase expenses, Receipts and other records for all improvements, additions, and other items that affect the home's adjusted basis, Any worksheets or other computations you used to figure the adjusted basis of the home you sold, the gain or loss on the sale, the exclusion, and the taxable gain, Any Form 982 you filed to report any discharge of qualified principal residence indebtedness, Any Form 2119, Sale of Your Home, you filed to postpone gain from the sale of a previous home before May 7, 1997, and Any worksheets you used to prepare Form 2119, such as the Adjusted Basis of Home Sold Worksheet or the Capital Improvements Worksheet from the Form 2119 instructions, or other source of computations. Taxes due 2012 Excluding the Gain You may qualify to exclude from your income all or part of any gain from the sale of your main home. Taxes due 2012 This means that, if you qualify, you will not have to pay tax on the gain up to the limit described under Maximum Exclusion , next. Taxes due 2012 To qualify, you must meet the ownership and use tests described later. Taxes due 2012 You can choose not to take the exclusion by including the gain from the sale in your gross income on your tax return for the year of the sale. Taxes due 2012 You can use Worksheet 2 in Publication 523 to figure the amount of your exclusion and your taxable gain, if any. Taxes due 2012 If you have any taxable gain from the sale of your home, you may have to increase your withholding or make estimated tax payments. Taxes due 2012 See Publication 505, Tax Withholding and Estimated Tax. Taxes due 2012 Maximum Exclusion You can exclude up to $250,000 of the gain (other than gain allocated to periods of nonqualified use) on the sale of your main home if all of the following are true. Taxes due 2012 You meet the ownership test. Taxes due 2012 You meet the use test. Taxes due 2012 During the 2-year period ending on the date of the sale, you did not exclude gain from the sale of another home. Taxes due 2012 For details on gain allocated to periods of nonqualified use, see Periods of nonqualified use , later. Taxes due 2012 You may be able to exclude up to $500,000 of the gain (other than gain allocated to periods of nonqualified use) on the sale of your main home if you are married and file a joint return and meet the requirements listed in the discussion of the special rules for joint returns, later, under Married Persons . Taxes due 2012 Ownership and Use Tests To claim the exclusion, you must meet the ownership and use tests. Taxes due 2012 This means that during the 5-year period ending on the date of the sale, you must have: Owned the home for at least 2 years (the ownership test), and Lived in the home as your main home for at least 2 years (the use test). Taxes due 2012 Exception. Taxes due 2012   If you owned and lived in the property as your main home for less than 2 years, you can still claim an exclusion in some cases. Taxes due 2012 However, the maximum amount you may be able to exclude will be reduced. Taxes due 2012 See Reduced Maximum Exclusion , later. Taxes due 2012 Example 1—home owned and occupied for at least 2 years. Taxes due 2012 Mya bought and moved into her main home in September 2011. Taxes due 2012 She sold the home at a gain in October 2013. Taxes due 2012 During the 5-year period ending on the date of sale in October 2013, she owned and lived in the home for more than 2 years. Taxes due 2012 She meets the ownership and use tests. Taxes due 2012 Example 2—ownership test met but use test not met. Taxes due 2012 Ayden bought a home, lived in it for 6 months, moved out, and never occupied the home again. Taxes due 2012 He later sold the home for a gain. Taxes due 2012 He owned the home during the entire 5-year period ending on the date of sale. Taxes due 2012 He meets the ownership test but not the use test. Taxes due 2012 He cannot exclude any part of his gain on the sale unless he qualified for a reduced maximum exclusion (explained later). Taxes due 2012 Period of Ownership and Use The required 2 years of ownership and use during the 5-year period ending on the date of the sale do not have to be continuous nor do they both have to occur at the same time. Taxes due 2012 You meet the tests if you can show that you owned and lived in the property as your main home for either 24 full months or 730 days (365 × 2) during the 5-year period ending on the date of sale. Taxes due 2012 Temporary absence. Taxes due 2012   Short temporary absences for vacations or other seasonal absences, even if you rent out the property during the absences, are counted as periods of use. Taxes due 2012 The following examples assume that the reduced maximum exclusion (discussed later) does not apply to the sales. Taxes due 2012 Example 1. Taxes due 2012 David Johnson, who is single, bought and moved into his home on February 1, 2011. Taxes due 2012 Each year during 2011 and 2012, David left his home for a 2-month summer vacation. Taxes due 2012 David sold the house on March 1, 2013. Taxes due 2012 Although the total time David used his home is less than 2 years (21 months), he meets the requirement and may exclude gain. Taxes due 2012 The 2-month vacations are short temporary absences and are counted as periods of use in determining whether David used the home for the required 2 years. Taxes due 2012 Example 2. Taxes due 2012 Professor Paul Beard, who is single, bought and moved into a house on August 18, 2010. Taxes due 2012 He lived in it as his main home continuously until January 5, 2012, when he went abroad for a 1-year sabbatical leave. Taxes due 2012 On February 6, 2013, 1 month after returning from the leave, Paul sold the house at a gain. Taxes due 2012 Because his leave was not a short temporary absence, he cannot include the period of leave to meet the 2-year use test. Taxes due 2012 He cannot exclude any part of his gain, because he did not use the residence for the required 2 years. Taxes due 2012 Ownership and use tests met at different times. Taxes due 2012   You can meet the ownership and use tests during different 2-year periods. Taxes due 2012 However, you must meet both tests during the 5-year period ending on the date of the sale. Taxes due 2012 Example. Taxes due 2012 Beginning in 2002, Helen Jones lived in a rented apartment. Taxes due 2012 The apartment building was later converted to condominiums, and she bought her same apartment on December 3, 2010. Taxes due 2012 In 2011, Helen became ill and on April 14 of that year she moved to her daughter's home. Taxes due 2012 On July 12, 2013, while still living in her daughter's home, she sold her condominium. Taxes due 2012 Helen can exclude gain on the sale of her condominium because she met the ownership and use tests during the 5-year period from July 13, 2008, to July 12, 2013, the date she sold the condominium. Taxes due 2012 She owned her condominium from December 3, 2010, to July 12, 2013 (more than 2 years). Taxes due 2012 She lived in the property from July 13, 2008 (the beginning of the 5-year period), to April 14, 2011 (more than 2 years). Taxes due 2012 The time Helen lived in her daughter's home during the 5-year period can be counted toward her period of ownership, and the time she lived in her rented apartment during the 5-year period can be counted toward her period of use. Taxes due 2012 Cooperative apartment. Taxes due 2012   If you sold stock as a tenant-stockholder in a cooperative housing corporation, the ownership and use tests are met if, during the 5-year period ending on the date of sale, you: Owned the stock for at least 2 years, and Lived in the house or apartment that the stock entitles you to occupy as your main home for at least 2 years. Taxes due 2012 Exceptions to Ownership and Use Tests The following sections contain exceptions to the ownership and use tests for certain taxpayers. Taxes due 2012 Exception for individuals with a disability. Taxes due 2012   There is an exception to the use test if: You become physically or mentally unable to care for yourself, and You owned and lived in your home as your main home for a total of at least 1 year during the 5-year period before the sale of your home. Taxes due 2012 Under this exception, you are considered to live in your home during any time within the 5-year period that you own the home and live in a facility (including a nursing home) licensed by a state or political subdivision to care for persons in your condition. Taxes due 2012 If you meet this exception to the use test, you still have to meet the 2-out-of-5-year ownership test to claim the exclusion. Taxes due 2012 Previous home destroyed or condemned. Taxes due 2012   For the ownership and use tests, you add the time you owned and lived in a previous home that was destroyed or condemned to the time you owned and lived in the replacement home on whose sale you wish to exclude gain. Taxes due 2012 This rule applies if any part of the basis of the home you sold depended on the basis of the destroyed or condemned home. Taxes due 2012 Otherwise, you must have owned and lived in the same home for 2 of the 5 years before the sale to qualify for the exclusion. Taxes due 2012 Members of the uniformed services or Foreign Service, employees of the intelligence community, or employees or volunteers of the Peace Corps. Taxes due 2012   You can choose to have the 5-year test period for ownership and use suspended during any period you or your spouse serve on “qualified official extended duty” as a member of the uniformed services or Foreign Service of the United States, or as an employee of the intelligence community. Taxes due 2012 You can choose to have the 5-year test period for ownership and use suspended during any period you or your spouse serve outside the United States either as an employee of the Peace Corps on "qualified official extended duty" or as an enrolled volunteer or volunteer leader of the Peace Corps. Taxes due 2012 This means that you may be able to meet the 2-year use test even if, because of your service, you did not actually live in your home for at least the required 2 years during the 5-year period ending on the date of sale. Taxes due 2012   If this helps you qualify to exclude gain, you can choose to have the 5-year test period suspended by filing a return for the year of sale that does not include the gain. Taxes due 2012 For more information about the suspension of the 5-year test period, see Members of the uniformed services or Foreign Service, employees of the intelligence community, or employees or volunteers of the Peace Corps in Publication 523. Taxes due 2012 Married Persons If you and your spouse file a joint return for the year of sale and one spouse meets the ownership and use tests, you can exclude up to $250,000 of the gain. Taxes due 2012 (But see Special rules for joint returns , next. Taxes due 2012 ) Special rules for joint returns. Taxes due 2012   You can exclude up to $500,000 of the gain on the sale of your main home if all of the following are true. Taxes due 2012 You are married and file a joint return for the year. Taxes due 2012 Either you or your spouse meets the ownership test. Taxes due 2012 Both you and your spouse meet the use test. Taxes due 2012 During the 2-year period ending on the date of the sale, neither you nor your spouse excluded gain from the sale of another home. Taxes due 2012 If either spouse does not satisfy all these requirements, the maximum exclusion that can be claimed by the couple is the total of the maximum exclusions that each spouse would qualify for if not married and the amounts were figured separately. Taxes due 2012 For this purpose, each spouse is treated as owning the property during the period that either spouse owned the property. Taxes due 2012 Example 1—one spouse sells a home. Taxes due 2012 Emily sells her home in June 2013 for a gain of $300,000. Taxes due 2012 She marries Jamie later in the year. Taxes due 2012 She meets the ownership and use tests, but Jamie does not. Taxes due 2012 Emily can exclude up to $250,000 of gain on a separate or joint return for 2013. Taxes due 2012 The $500,000 maximum exclusion for certain joint returns does not apply because Jamie does not meet the use test. Taxes due 2012 Example 2—each spouse sells a home. Taxes due 2012 The facts are the same as in Example 1 except that Jamie also sells a home in 2013 for a gain of $200,000 before he marries Emily. Taxes due 2012 He meets the ownership and use tests on his home, but Emily does not. Taxes due 2012 Emily can exclude $250,000 of gain and Jamie can exclude $200,000 of gain on the respective sales of their individual homes. Taxes due 2012 However, Emily cannot use Jamie's unused exclusion to exclude more than $250,000 of gain. Taxes due 2012 Therefore, Emily and Jamie must recognize $50,000 of gain on the sale of Emily's home. Taxes due 2012 The $500,000 maximum exclusion for certain joint returns does not apply because Emily and Jamie do not both meet the use test for the same home. Taxes due 2012 Sale of main home by surviving spouse. Taxes due 2012   If your spouse died and you did not remarry before the date of sale, you are considered to have owned and lived in the property as your main home during any period of time when your spouse owned and lived in it as a main home. Taxes due 2012   If you meet all of the following requirements, you may qualify to exclude up to $500,000 of any gain from the sale or exchange of your main home. Taxes due 2012 The sale or exchange took place after 2008. Taxes due 2012 The sale or exchange took place no more than 2 years after the date of death of your spouse. Taxes due 2012 You have not remarried. Taxes due 2012 You and your spouse met the use test at the time of your spouse's death. Taxes due 2012 You or your spouse met the ownership test at the time of your spouse's death. Taxes due 2012 Neither you nor your spouse excluded gain from the sale of another home during the last 2 years. Taxes due 2012 Example. Taxes due 2012   Harry owned and used a house as his main home since 2009. Taxes due 2012 Harry and Wilma married on July 1, 2013, and from that date they use Harry's house as their main home. Taxes due 2012 Harry died on August 15, 2013, and Wilma inherited the property. Taxes due 2012 Wilma sold the property on September 3, 2013, at which time she had not remarried. Taxes due 2012 Although Wilma owned and used the house for less than 2 years, Wilma is considered to have satisfied the ownership and use tests because her period of ownership and use includes the period that Harry owned and used the property before death. Taxes due 2012 Home transferred from spouse. Taxes due 2012   If your home was transferred to you by your spouse (or former spouse if the transfer was incident to divorce), you are considered to have owned it during any period of time when your spouse owned it. Taxes due 2012 Use of home after divorce. Taxes due 2012   You are considered to have used property as your main home during any period when: You owned it, and Your spouse or former spouse is allowed to live in it under a divorce or separation instrument and uses it as his or her main home. Taxes due 2012 Reduced Maximum Exclusion If you fail to meet the requirements to qualify for the $250,000 or $500,000 exclusion, you may still qualify for a reduced exclusion. Taxes due 2012 This applies to those who: Fail to meet the ownership and use tests, or Have used the exclusion within 2 years of selling their current home. Taxes due 2012 In both cases, to qualify for a reduced exclusion, the sale of your main home must be due to one of the following reasons. Taxes due 2012 A change in place of employment. Taxes due 2012 Health. Taxes due 2012 Unforeseen circumstances. Taxes due 2012 Unforeseen circumstances. Taxes due 2012   The sale of your main home is because of an unforeseen circumstance if your primary reason for the sale is the occurrence of an event that you could not reasonably have anticipated before buying and occupying your main home. Taxes due 2012   See Publication 523 for more information and to use Worksheet 3 to figure your reduced maximum exclusion. Taxes due 2012 Business Use or Rental of Home You may be able to exclude gain from the sale of a home you have used for business or to produce rental income. Taxes due 2012 But you must meet the ownership and use tests. Taxes due 2012 Periods of nonqualified use. Taxes due 2012   In most cases, gain from the sale or exchange of your main home will not qualify for the exclusion to the extent that the gains are allocated to periods of nonqualified use. Taxes due 2012 Nonqualified use is any period after 2008 during which neither you nor your spouse (or your former spouse) used the property as a main home with the following exceptions. Taxes due 2012 Exceptions. Taxes due 2012   A period of nonqualified use does not include: Any portion of the 5-year period ending on the date of the sale or exchange after the last date you (or your spouse) use the property as a main home; Any period (not to exceed an aggregate period of 10 years) during which you (or your spouse) are serving on qualified official extended duty: As a member of the uniformed services; As a member of the Foreign Service of the United States; or As an employee of the intelligence community; and Any other period of temporary absence (not to exceed an aggregate period of 2 years) due to change of employment, health conditions, or such other unforeseen circumstances as may be specified by the IRS. Taxes due 2012 The gain resulting from the sale of the property is allocated between qualified and nonqualified use periods based on the amount of time the property was held for qualified and nonqualified use. Taxes due 2012 Gain from the sale or exchange of a main home allocable to periods of qualified use will continue to qualify for the exclusion for the sale of your main home. Taxes due 2012 Gain from the sale or exchange of property allocable to nonqualified use will not qualify for the exclusion. Taxes due 2012 Calculation. Taxes due 2012   To figure the portion of the gain allocated to the period of nonqualified use, multiply the gain by the following fraction:   Total nonqualified use during the period of ownership after 2008      Total period of ownership     This calculation can be found in Worksheet 2, line 10, in Publication 523. Taxes due 2012 Example 1. Taxes due 2012 On May 23, 2007, Amy, who is unmarried for all years in this example, bought a house. Taxes due 2012 She moved in on that date and lived in it until May 31, 2009, when she moved out of the house and put it up for rent. Taxes due 2012 The house was rented from June 1, 2009, to March 31, 2011. Taxes due 2012 Amy claimed depreciation deductions in 2009 through 2011 totaling $10,000. Taxes due 2012 Amy moved back into the house on April 1, 2011, and lived there until she sold it on January 31, 2013, for a gain of $200,000. Taxes due 2012 During the 5-year period ending on the date of the sale (January 31, 2008-January 31, 2013), Amy owned and lived in the house for more than 2 years as shown in the following table. Taxes due 2012 Five Year Period Used as  Home Used as  Rental 1/31/08 – 5/31/09 16 months       6/1/09 – 3/31/11   22 months 4/1/11 – 1/31/13 22 months         38 months 22 months During the period Amy owned the house (2,080 days), her period of nonqualified use was 668 days. Taxes due 2012 Amy divides 668 by 2,080 and obtains a decimal (rounded to at least three decimal places) of 0. Taxes due 2012 321. Taxes due 2012 To figure her gain attributable to the period of nonqualified use, she multiplies $190,000 (the gain not attributable to the $10,000 depreciation deduction) by 0. Taxes due 2012 321. Taxes due 2012 Because the gain attributable to periods of nonqualified use is $60,990, Amy can exclude $129,010 of her gain. Taxes due 2012 Example 2. Taxes due 2012 William owned and used a house as his main home from 2007 through 2010. Taxes due 2012 On January 1, 2011, he moved to another state. Taxes due 2012 He rented his house from that date until April 30, 2013, when he sold it. Taxes due 2012 During the 5-year period ending on the date of sale (May 1, 2008-April 30, 2013), William owned and lived in the house for more than 2 years. Taxes due 2012 He must report the sale on Form 4797 because it was rental property at the time of sale. Taxes due 2012 Because the period of nonqualified use does not include any part of the 5-year period after the last date William lived in the house, he has no period of nonqualified use. Taxes due 2012 Because he met the ownership and use tests, he can exclude gain up to $250,000. Taxes due 2012 However, he cannot exclude the part of the gain equal to the depreciation he claimed or could have claimed for renting the house, as explained next. Taxes due 2012 Depreciation after May 6, 1997. Taxes due 2012   If you were entitled to take depreciation deductions because you used your home for business purposes or as rental property, you cannot exclude the part of your gain equal to any depreciation allowed or allowable as a deduction for periods after May 6, 1997. Taxes due 2012 If you can show by adequate records or other evidence that the depreciation allowed was less than the amount allowable, then you may limit the amount of gain recognized to the depreciation allowed. Taxes due 2012 See Publication 544 for more information. Taxes due 2012 Property used partly for business or rental. Taxes due 2012   If you used property partly as a home and partly for business or to produce rental income, see Publication 523. Taxes due 2012 Reporting the Sale Do not report the 2013 sale of your main home on your tax return unless: You have a gain and do not qualify to exclude all of it, You have a gain and choose not to exclude it, or You received Form 1099-S. Taxes due 2012 If any of these conditions apply, report the entire gain or loss. Taxes due 2012 For details on how to report the gain or loss, see the Instructions for Schedule D (Form 1040) and the Instructions for Form 8949. Taxes due 2012 If you used the home for business or to produce rental income, you may have to use Form 4797 to report the sale of the business or rental part (or the sale of the entire property if used entirely for business or rental). Taxes due 2012 See Business Use or Rental of Home in Publication 523 and the Instructions for Form 4797. Taxes due 2012 Installment sale. Taxes due 2012    Some sales are made under arrangements that provide for part or all of the selling price to be paid in a later year. Taxes due 2012 These sales are called “installment sales. Taxes due 2012 ” If you finance the buyer's purchase of your home yourself instead of having the buyer get a loan or mortgage from a bank, you probably have an installment sale. Taxes due 2012 You may be able to report the part of the gain you cannot exclude on the installment basis. Taxes due 2012    Use Form 6252, Installment Sale Income, to report the sale. Taxes due 2012 Enter your exclusion on line 15 of Form 6252. Taxes due 2012 Seller-financed mortgage. Taxes due 2012   If you sell your home and hold a note, mortgage, or other financial agreement, the payments you receive in most cases consist of both interest and principal. Taxes due 2012 You must separately report as interest income the interest you receive as part of each payment. Taxes due 2012 If the buyer of your home uses the property as a main or second home, you must also report the name, address, and social security number (SSN) of the buyer on line 1 of Schedule B (Form 1040A or 1040). Taxes due 2012 The buyer must give you his or her SSN, and you must give the buyer your SSN. Taxes due 2012 Failure to meet these requirements may result in a $50 penalty for each failure. Taxes due 2012 If either you or the buyer does not have and is not eligible to get an SSN, see Social Security Number in chapter 1. Taxes due 2012 More information. Taxes due 2012   For more information on installment sales, see Publication 537, Installment Sales. Taxes due 2012 Special Situations The situations that follow may affect your exclusion. Taxes due 2012 Sale of home acquired in a like-kind exchange. Taxes due 2012   You cannot claim the exclusion if: You acquired your home in a like-kind exchange (also known as a section 1031 exchange), or your basis in your home is determined by reference to the basis of the home in the hands of the person who acquired the property in a like-kind exchange (for example, you received the home from that person as a gift), and You sold the home during the 5-year period beginning with the date your home was acquired in the like-kind exchange. Taxes due 2012 Gain from a like-kind exchange is not taxable at the time of the exchange. Taxes due 2012 This means that gain will not be taxed until you sell or otherwise dispose of the property you receive. Taxes due 2012 To defer gain from a like-kind exchange, you must have exchanged business or investment property for business or investment property of a like kind. Taxes due 2012 For more information about like-kind exchanges, see Publication 544, Sales and Other Dispositions of Assets. Taxes due 2012 Home relinquished in a like-kind exchange. Taxes due 2012   If you use your main home partly for business or rental purposes and then exchange the home for another property, see Publication 523. Taxes due 2012 Expatriates. Taxes due 2012   You cannot claim the exclusion if the expatriation tax applies to you. Taxes due 2012 The expatriation tax applies to certain U. Taxes due 2012 S. Taxes due 2012 citizens who have renounced their citizenship (and to certain long-term residents who have ended their residency). Taxes due 2012 For more information about the expatriation tax, see Expatriation Tax in chapter 4 of Publication 519, U. Taxes due 2012 S. Taxes due 2012 Tax Guide for Aliens. Taxes due 2012 Home destroyed or condemned. Taxes due 2012   If your home was destroyed or condemned, any gain (for example, because of insurance proceeds you received) qualifies for the exclusion. Taxes due 2012   Any part of the gain that cannot be excluded (because it is more than the maximum exclusion) can be postponed under the rules explained in: Publication 547, in the case of a home that was destroyed, or Publication 544, chapter 1, in the case of a home that was condemned. Taxes due 2012 Sale of remainder interest. Taxes due 2012   Subject to the other rules in this chapter, you can choose to exclude gain from the sale of a remainder interest in your home. Taxes due 2012 If you make this choice, you cannot choose to exclude gain from your sale of any other interest in the home that you sell separately. Taxes due 2012 Exception for sales to related persons. Taxes due 2012   You cannot exclude gain from the sale of a remainder interest in your home to a related person. Taxes due 2012 Related persons include your brothers, sisters, half-brothers, half-sisters, spouse, ancestors (parents, grandparents, etc. Taxes due 2012 ), and lineal descendants (children, grandchildren, etc. Taxes due 2012 ). Taxes due 2012 Related persons also include certain corporations, partnerships, trusts, and exempt organizations. Taxes due 2012 Recapturing (Paying Back) a Federal Mortgage Subsidy If you financed your home under a federally subsidized program (loans from tax-exempt qualified mortgage bonds or loans with mortgage credit certificates), you may have to recapture all or part of the benefit you received from that program when you sell or otherwise dispose of your home. Taxes due 2012 You recapture the benefit by increasing your federal income tax for the year of the sale. Taxes due 2012 You may have to pay this recapture tax even if you can exclude your gain from income under the rules discussed earlier; that exclusion does not affect the recapture tax. Taxes due 2012 Loans subject to recapture rules. Taxes due 2012   The recapture applies to loans that: Came from the proceeds of qualified mortgage bonds, or Were based on mortgage credit certificates. Taxes due 2012 The recapture also applies to assumptions of these loans. Taxes due 2012 When recapture applies. Taxes due 2012   Recapture of the federal mortgage subsidy applies only if you meet both of the following conditions. Taxes due 2012 You sell or otherwise dispose of your home at a gain within the first 9 years after the date you close your mortgage loan. Taxes due 2012 Your income for the year of disposition is more than that year's adjusted qualifying income for your family size for that year (related to the income requirements a person must meet to qualify for the federally subsidized program). Taxes due 2012 When recapture does not apply. Taxes due 2012   Recapture does not apply in any of the following situations. Taxes due 2012 Your mortgage loan was a qualified home improvement loan (QHIL) of not more than $15,000 used for alterations, repairs, and improvements that protect or improve the basic livability or energy efficiency of your home. Taxes due 2012 Your mortgage loan was a QHIL of not more than $150,000 in the case of a QHIL used to repair damage from Hurricane Katrina to homes in the hurricane disaster area; a QHIL funded by a qualified mortgage bond that is a qualified Gulf Opportunity Zone Bond; or a QHIL for an owner-occupied home in the Gulf Opportunity Zone (GO Zone), Rita GO Zone, or Wilma GO Zone. Taxes due 2012 For more information, see Publication 4492, Information for Taxpayers Affected by Hurricanes Katrina, Rita, and Wilma. Taxes due 2012 Also see Publication 4492-B, Information for Affected Taxpayers in the Midwestern Disaster Areas. Taxes due 2012 The home is disposed of as a result of your death. Taxes due 2012 You dispose of the home more than 9 years after the date you closed your mortgage loan. Taxes due 2012 You transfer the home to your spouse, or to your former spouse incident to a divorce, where no gain is included in your income. Taxes due 2012 You dispose of the home at a loss. Taxes due 2012 Your home is destroyed by a casualty, and you replace it on its original site within 2 years after the end of the tax year when the destruction happened. Taxes due 2012 The replacement period is extended for main homes destroyed in a federally declared disaster area, a Midwestern disaster area, the Kansas disaster area, and the Hurricane Katrina disaster area. Taxes due 2012 For more information, see Replacement Period in Publication 547. Taxes due 2012 You refinance your mortgage loan (unless you later meet the conditions listed previously under When recapture applies ). Taxes due 2012 Notice of amounts. Taxes due 2012   At or near the time of settlement of your mortgage loan, you should receive a notice that provides the federally subsidized amount and other information you will need to figure your recapture tax. Taxes due 2012 How to figure and report the recapture. Taxes due 2012    The recapture tax is figured on Form 8828. Taxes due 2012 If you sell your home and your mortgage is subject to recapture rules, you must file Form 8828 even if you do not owe a recapture tax. Taxes due 2012 Attach Form 8828 to your Form 1040. Taxes due 2012 For more information, see Form 8828 and its instructions. Taxes due 2012 Prev  Up  Next   Home   More Online Publications